April 30, 2002 9:30 AM PDT

Battering down Gates' defense

WASHINGTON--Microsoft Chairman Bill Gates' argument that a modular version of Windows would "turn back the clock" on software development and damage the computer industry is fundamentally flawed, legal experts said.

Gates, in testimony last week, said a remedy proposed by nine states and the District of Columbia in the ongoing antitrust case to compel Microsoft to offer PC makers a customizable version of Windows would lead to fragmentation of the operating system market, in turn destabilizing the personal computer industry.

Legal experts and industry analysts said Gates' defense is a one-dimensional portrayal of competition in the personal computer market. They contend the states' plan would actually lead to more competition, more innovation and lower prices.

"What Gates is saying is that monopoly will produce the best innovation," said Andy Gavil, an antitrust professor with Howard University School of Law. "It's the same argument every monopolist makes. You've got cases going back nearly 100 years where monopolists, trade associations and other firms say what they tried to do was make things better, because in their industry competition would be bad."

In Gates' view, as stated in court, the stability and market dominance of Windows fosters competition. Software and hardware developers have a single platform they can write applications or drivers to, and consumers have a greater choice of applications resulting from this stability. "You wouldn't have that assurance" with multiple Windows versions, Gates testified.

The nine states and the District of Columbia prosecuting Microsoft want the company to distribute a version of Windows without so-called middleware such as Web browsing and media playback software. Gates last week admitted that Microsoft already sells a modular version of Windows, called Windows XP Embedded, that could satisfy the states' request. But Microsoft's licensing agreement for Windows XP Embedded does not allow the product to be installed that way.

Gates said that plan would lead to fragmentation of the market. "Windows would no longer be uniform" and those licensing the middleware-free version "would have the ability to make essentially arbitrary changes to Windows," Gates testified.


"If you put the pieces together, what Gates was really saying is that in his industry, competition would be bad," Gavil said. "That argument is not a defense to an antitrust violation. Congress has declared that the law of the land is competition through the Sherman Act."

Moreover, experts said, Microsoft itself already fragments the Windows market, with multiple versions of the operating system already available and more diversified versions planned. There are also multiple versions of Microsoft's Internet Explorer Web browser and Media Player software in the marketplace. The major difference? Microsoft controls the level of fragmentation to benefit its marketing agenda. The proposed remedy would place that power in the hands of PC makers.

"Fragmentation is the last defense of a monopolist," said Glenn Manishin, an antitrust attorney with Kelley Drye & Warren in Vienna, Va. "It's the equivalent to arguing that monopolies are better, because they know better. That (thinking) went out in the '50s with 'Father Knows Best.'"

Precedent in AT&T breakup
Legal experts cite the communications boom following the 1984 breakup of AT&T as evidence that Gates' reasoning is flawed.

That breakup fostered an era of competition through product diversification, innovation and greater consumer choice, they argue. For example, Manishin questioned whether the proliferation of wireless devices would have emerged under the AT&T communications monopoly. Pre-breakup, AT&T had the power to enhance its market dominance in one market to extend into the fledging wireless area to quash a potential threat to its communications monopoly.

In his two-part ruling against Microsoft, U.S. District Judge Thomas Penfield Jackson found that Microsoft had used its monopoly power to quash the threat it saw from Netscape Communications' browser and Sun Microsystems' Java programming language. In June 2001, a seven-judge Court of Appeals panel upheld the core of Jackson's ruling, that Microsoft used illegal means to preserve its monopoly in Intel-based operating systems.

"You can't even tell what would have emerged (in the industry) but for Microsoft's conduct," Gavil said. "We don't have to be able to tell. What we know is that a noncompetitive process was determining innovation. By definition, that can't produce the optimal amount of innovation."

In court, Gates also argued that multiple versions of Windows would essentially stifle competition by confusing consumers and putting developers "into a situation like the computer industry was before the PC came along." He said consumers would face a jarring experience due to multiple Windows versions customized by PC makers and uncertainty about the interface or whether applications would run on them.

But developers and consumers already face this so-called fragmentation in the highly competitive cell phone market and with hybrid wireless handheld devices. That increases the choices available to consumers, say legal experts.

"Those cell phone companies compete on the differences," Manishin said. "They compete on how their service is different, how their handsets are better than another's--better battery life, instant text messaging and more. There is no jolting experience going from one to the other."

Windows already is fragmented
While arguing that the states' remedy would disastrously fragment Windows, Gates defended the existence of multiple versions of the operating system. But he emphasized the company's focus is the current version, Windows XP.

In reality, the Windows installed base is already diversified. "If you started dividing up the Windows operating system market in terms of installed base, a little less than a quarter of the total would be Windows 95, about three-eighths would be Windows 98, and the balance would be the rest of their products," said IDC analyst Al Gillen. Those products would be: Windows Me, NT, 2000 and XP.

While different versions of Windows are still widely used, Microsoft decides how long a PC maker can sell a particular version, and it limits the amount of time it will provide customer support for any given version. During his testimony, Gates acknowledged that Microsoft licensed the current version of Windows to PC makers because of the newest features available.

"If they want to run on multiple versions of Windows, sometimes we give them things that will help with that, but...generally our strongest wish is to have them take advantage of the latest work that we've done," Gates testified. In terms of software developers, Microsoft gives support for existing applications to run on the current version of Windows. But new applications must be developed for what the company considers the current version.

In a truly competitive market, different Windows versions would be available as long as there is demand, said Bob Lande, an antitrust professor at the University of Baltimore's law school. In fact, the states remedy proposal would make older versions available at a lower sale price.

Gates' fragmentation argument also ignored the work Microsoft has done and is doing to diversify Windows XP. Already the company sells three versions of the operating system released on Oct. 25: Windows HP Home for consumers, Professional for businesses, and Embedded for use on non-PC devices. Microsoft's support of Advanced Micro Devices' Hammer microprocessor could lead to yet another version of Windows XP. In later summer, Microsoft is expected to release XP for Tablet PC and modify the existing version for wireless screen devices known as Mira.

At the same time, Microsoft's eHome division has been developing Freestyle, an alternative XP user interface that unlocks the operating systems' digital media features using a remote control.

New versions of Windows XP could create more opportunity for PC makers to expand beyond traditional computer designs, at the same time expanding consumer choice. But currently the key decisions remain with Microsoft, which controls the operating system and sets strict guidelines for the hardware and how it works with Windows. The existing fragmentation also means software developers are dealing with the problems associated with writing code to different operating systems. The difference: Microsoft, not competition, makes the choice what versions are available to the market.

Apple Computer may be the model for the type of PC maker competition that could arise from the proliferation of multiple Windows versions, analysts say. Apple controls the operating system and the computers, allowing the company to offer more striking designs and software geared toward specific consumer trends--for example, the flat-panel iMac released in January and Apple's iDVD, iPhoto, iMovie and iTunes software for use with digital media and devices.

In the diversified Windows world, PC makers could add their own middleware and software components, allowing them more control over the operating system and the hardware the way Apple does.

"You could use the Apple metaphor," said IDC analyst Roger Kay. "In terms of user experience, a Gateway could certainly integrate the user experience on behalf of its users in their own unique way. What would really make it Apple-like is if over time, the Gateway PC becomes its own unique thing rather than all these pieces that appear glued together as they do today in the Windows environment."

Earlier this month, AOL Vice President John Borthwick testified how Microsoft's tight control over PC design prevents computer makers from developing more innovative computers. In court, he demonstrated a prototype Lego PC that used no Microsoft middleware.

Jeff Shohet, an antitrust attorney with Gray Cary's San Diego office, argued that the states' provision for a second version of Windows without middleware would be a boon for competition and strike at the heart of the monopoly maintenance ruling against Microsoft.

"You do some things that are in the nature of a structural remedy without breaking up the company," he said. "You disarm it; you disable it from using that operating system power to prevent innovation in the market. You must offer to the market a version of Windows strictly stripped of all the middleware. It's just the operating system. And let the market decide whether they want to build onto that."

 

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